This past week, U.S. stocks (S&P 500) were within a whisker of entering an official bear market. That bear market definition is a decline of 20% or more. But on Friday, the market got off the mat, dusted itself off and offered a one-day relief rally. The S&P 500 was up 2.8% while the tech-heavy Nasdaq 100 was up 3.8%. The Canadian market was up 1.9% on Friday. Are we done? Are we there yet? Will stocks mount an ongoing rally?
No one knows what will happen, to state the obvious. Stock and bond markets are forward-thinking, but recently they’ve been tying themselves in knots. They don’t know what to think, and they don’t know how forward they should look.
The economic backdrop
Inflation is out of control. Inflation is ‘bad’. 🙁 Central banks are increasing rates in the attempt to cool the economy (reduce consumer demand) without causing a recession. They call that a soft landing.
If they do not get inflation under control we may suffer through a stagflationary period. In fact, we’ve already entered a stagflationary environment. But once again, we don’t know what will happen. Stagflation could be transitory. Remember that word? Of course, central banks were wrong, and inflation has turned out to be more lasting.
Like a box of chocolates
We could get a soft landing. We could get a recession. That recession could be mild and short. Or, we could experience a long and deep recession, that could even glide to a depression. Yes the “D” word. That’s unlikely, but hey, anything could happen.
The truth of the matter is, life and investing is like a box of chocolates. We don’t know what we will get. That’s why I, personally, embrace an all-weather portfolio approach.
On MoneySense, Kyle Provost certainly had fun trying to make sense of it all.
But make no mistake, inflation is driving the bus. And the central banks have to drive a dagger deep into that beast. If they don’t kill it good the first time, it will keep raising its ugly head (see the staglfation fight of 1970s into early 1980s). Central bankers tried half-killing inflation a few times. In the end Fed Chair Paul Volker in the U.S. had to increase rates to 21%. Let’s not go there.
Many economists suggest that we should take our tough medicine now.
Be ready for more volatility and silliness
The stock and bond markets are forward-thinking. They play a game of chess. Stocks don’t wait for the end of a recession (and a resumption to economic growth) to take prices higher. They know that recessions eventually end and growth returns, so they try to get out in front. They’ll will usually start the move up during the recession.
In the following chart the grey bars are recessions.
Bonds have recently been getting crushed. But they had a very good week last week. Yields dropped, bond prices went up. The bond market is thinking ahead. Instead of predicting that we’ll enter a period of stagflation, and that rates will need to keep going up, up, up; the market is predicting economic weakness and perhaps a recession. Rates will eventually have to be lowered to stimulate economic growth. Yes, they are ‘thinking’ all of this even before we’ve fought inflation and created much or any economic weakness.
And the recent moves doesn’t mean the bond market is ‘right’.
Now we can see why it is so ‘difficult’ to time any of this.
Keep on keepin’ on
Stocks and bonds have been going on sale. If you’re in the accumulation stage, and you hold a balanced portfolio of some sort, keep adding. Ditto if you’re in the accumulation stage and you hold all equities. They’re going on sale. I’d prefer to look for greater present value (real earnings) but I’ll leave that up to you.
If you’re in retirement or near retirement make sure you have a nice balance of assets and play some defense. When we hold enough short term bonds and cash we can take a lot of the stock market risk out of the picture. We don’t need stock market gains tomorrow to fund our retirement. Plus, a generous dividend income stream can help the cause.
We don’t know what we’re going to get. Be ready for anything, especially if you’re in retirement or preparing for retirement.
More Sunday Reads
We’ll kick off the Sunday Reads with Mark’s Weekend Reads at My Own Advisor. It’s the how to create shareholder value edition. There’s some nice balanced perspective in there from Mark on dividend income vs total return. I am certainly in the hybrid camp.
For American readers, Fritz at The Retirement Manifesto offers when you might claim social security.
And while we’re south of the border, doc at FiPhysician offers up on tax efficient investing for retirement.
I will be conducting a Zoom call on retirement and retirement funding. You can sign up here.
Dividend Hawk delivers his personal portfolio review.
Off to the west coast, and north of the border, Bob at Tawcan offers his Q1 update with goals and resolutions. It goes without saying, we need life goals and financial goals. We need a plan, or often, not much gets done.
And in case you may have missed it here’s the portfolio update at Passive Canadian Income.
Also, Dividend Daddy provided an April update.
If you’re looking for stock ideas, here’s 10 of the best for May from stocktrades.ca
What’s the deal with mutual funds?
That question was asked on Findependence Hub. Of course, Cut The Crap Investing readers know the answer. Most mutual funds (and their attached sales force) are destructive. You should mostly avoid them. Go Canadian Robo Advisor, or check out an asset allocation ETF if you can press that buy button at your discount brokerage.
And this news was also troubling. Only 7% of investors at full service advisory shops receive full service. Canadians are paying for services they don’t receive. Just like mutual funds where Canadians pay high fees and usually receive no advice, or at times receive poor adivce (advice that serves the advisor and fund manager).
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